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Fiscal Policy, Monetary Targets, and the Price Level in a Centrally Planned Economy: An Application to the Case of China

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  • Feltenstein, Andrew
  • Farhadian, Ziba

Abstract

This paper presents a planned-economy monetary model of China. A money supply equation links changes in broad money to government transactions evaluated at official prices. The demand for real money balances by consumers equals the nominal demand for money deflated by an unobserved true price index. The model explains money demand as the divergence between the then official and true price indices. Changes in the money supply are explained by government transactions, while money demand is explained by real income and the anticipated true rate of inflation. The true rate of inflation is 2.5 times the official rate. Copyright 1987 by Ohio State University Press.

Suggested Citation

  • Feltenstein, Andrew & Farhadian, Ziba, 1987. "Fiscal Policy, Monetary Targets, and the Price Level in a Centrally Planned Economy: An Application to the Case of China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 137-156, May.
  • Handle: RePEc:mcb:jmoncb:v:19:y:1987:i:2:p:137-56
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    Cited by:

    1. Portes, Richard & Santorum, Anita, 1987. "Money and the consumption goods market in China," Journal of Comparative Economics, Elsevier, vol. 11(3), pages 354-371, September.
    2. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    3. Kui-Wai Li, 1997. "Money and monetization in China's economic reform," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1139-1146.
    4. Jeffrey Zax, 2014. "Housing allocations, imputed rents and inequality in urban China," ERSA conference papers ersa14p1682, European Regional Science Association.
    5. Bennett, John & Dixon, Huw David, 1995. "Macroeconomic equilibrium and reform in a transitional economy," European Economic Review, Elsevier, vol. 39(8), pages 1465-1485, October.
    6. Gary Wong & Qiao Yu, 2001. "Inverse Demand Systems for Composite Liquid Assets: Evidence from China," School of Economics and Finance Discussion Papers and Working Papers Series 097, School of Economics and Finance, Queensland University of Technology.
    7. Austin, Darran & Ward, Bert & Dalziel, Paul, 2007. "The demand for money in China 1987-2004: A non-linear modelling approach," China Economic Review, Elsevier, vol. 18(2), pages 190-204.
    8. Ge Wu, 2009. "Broad Money Demand and Asset Substitution in China," IMF Working Papers 09/131, International Monetary Fund.
    9. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
    10. Mookerjee, Rajen & Peebles, Gavin, 1998. "Endogenous money in China: Evidence and insights on recent policies," Journal of Asian Economics, Elsevier, vol. 9(1), pages 139-158.
    11. Delatte, Anne-Laure & Fouquau, Julien & Holz, Carsten, 2013. "Understanding Money Demand in the Transition from a Centrally Planned to a Market Economy," CEPR Discussion Papers 9721, C.E.P.R. Discussion Papers.
    12. Ying Wu, 2010. "Exchange Rates and Prices under Processing Trade: A Macroeconomic Analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(3), pages 345-357, September.
    13. Mohsen Bahmani-Oskooee & Yongqing Wang, 2007. "How Stable Is The Demand For Money In China?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 32(1), pages 21-33, June.
    14. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    15. Fung, Michael K. Y. & Ho, Wai-Ming & Zhu, Lijing, 2000. "Stagflationary effect of government bond financing in the transforming Chinese economy: a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 61(1), pages 111-135, February.
    16. Hasan, Mohammad S., 1999. "Monetary Growth and Inflation in China: A Reexamination," Journal of Comparative Economics, Elsevier, vol. 27(4), pages 669-685, December.

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